NEW YORK--(BUSINESS WIRE)--Falling commodity prices and expectations for slowing growth has begun to pry loose midstream assets housed in exploration and production (E&P) companies, according to Fitch Ratings. Midstream assets' valuations have held up well even as prices have fallen. Such asset sales could help provide capital needed to cover funding short falls associated with oil at the $50 price level.
Fitch expects lower commodity prices may also have an indirect effect on select midstream and master limited partnership (MLP) names, specifically those with direct exposure to commodity prices or names with limited asset and geographic diversity and less robust growth backlogs as upstream names scale back production.
We expect midstream MLP credit quality will be under pressure as smaller, growth challenged MLPs try to maintain distribution growth. We believe continued pressure will drive commodity exposed midstream issuers to diversify and scale up operations in an effort to more effectively grow and maintain cash flow stability. Slower production growth will lead to limited opportunities for midstream providers to grow, particularly for names with limited geographic or business line diversity and prompt merger activity.
Larger investment-grade midstream names are likely to be acquirers as they are better positioned from a liquidity and capital market access standpoint to take advantage of opportunities to purchase assets that help further provide scale, geographic or business line diversity, or provide a nice platform for future growth. Fitch expects this mergers and acquisitions (M&A) consolidation trend to accelerate as upstream production contracts and E&P names look to fill funding gaps with asset sales and smaller scale, sub-investment grade midstream names struggle with future growth. This trend is starting to emerge with recent increased merger activity in the midstream space. The credit ramifications for midstream names expected to be neutral to positive should prices paid be reasonable and the assets acquired offer operational benefits.
Last month, Kinder Morgan Inc. (KMI [BBB-/Stable]) kicked-off midstream acquisitions for 2015 announcing it would buy Hiland Partners, LP for $3 billion including the assumption of roughly $1 billion of Hiland debt from Harold Hamm CEO of Continental Resources. Energy Transfer Partners, LP (ETP [BBB-/Stable]) soon followed with its own transaction announcing the acquisition of affiliate Regency Energy Partners, LP (RGP; [BB/RWP]) in a unit-for-unit transaction valued at roughly $18 billion including the assumption RGP debt. Low commodity prices had weighed on RGP's ability to fund accretive growth and the transaction provided ETP an opportunity to fund that growth its lower cost of capital and consolidate midstream assets across multiple basins.
Elsewhere, several other midstream transactions are expected in the near to intermediate term. Pioneer Natural Resources Company (PXD; BBB-/Stable) announced on Feb. 4 that it was pursuing the sale of its 50.1% stake in its Eagle Ford Shale Midstream business, EFS Midstream. PXD's sale of is being pursued to allow PXD to redeploy capital in other core production areas. The asset sale has been rumored to be in the $3 billion range.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.